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Is the warehouse business recession proof?

Wwith a straw hat, sunglasses, and a red plaid shirt, Randy Bekendam wears every inch of the grizzled farmer, albeit in a California countercultural way. The tomatoes, slices and King David apples he sells at this time of year have never seen a pesticide. Young families visit to pet their goats and learn about the merits of healthy soil. The 70-year-old is also unashamed to share his convictions. They run deep. The land he has rented for the last 34 years, called Amy’s Farm, has been sold under him. Now, echoing Joni Mitchell, he is fighting to prevent the rural idyll from being paved over and turned into a warehouse.

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His Ontario hometown, less than an hour’s drive east of Los Angeles, is now almost as littered with windowless “fulfillment centers” as it once was with orange and lemon groves. From his ten-acre lot, he can see them closing in on him. Across the street, a building the size of 100 football fields, or 5.3 million square feet (492,000 square meters), rises from the land of what used to be a dairy farm. A block away, Prologis, the world’s largest warehouse builder, has nearly completed a five-story facility on more than 4 million square feet of land; the blue livery of Amazon, an e-commerce giant, already adorns its top edge. Nearby, Amazon and FedEx, a package handler, have larger boxes. 18-wheelers rumble down the country roads between them. The dust they raise suffocates a man who vomits Coconut cold (cold coconuts) to the few remaining Mexican peasants working the land. “Those big trucks go where they want,” mutters Mr. Bekendam.

Coincidentally, your columnist visited Ontario on September 16, just after FedEx warned of economic headwinds, scrapped its earnings forecast and triggered a 21% drop in its share price. That quickly turned into concerns about the future of storage companies like Prologis, worth $80 billion. Its share price had already dipped from its highs this year after Amazon, its biggest customer, admitted it had overbuilt.

You’d think the rising risk of a recession, Amazon’s downsizing (though not in Ontario), and the outcry from those like Bekendam fighting to stop warehouse construction would worry this booming industry. Not a bit of that. A visit to Southern California’s Inland Empire, once called “the land of cheap dirt” and now the world’s hottest warehouse market, leaves little doubt that the giant’s wheels won’t fall off just yet.

Just about everything about the Inland Empire excites logistics nerds. The region, two-thirds the size of Connecticut, is sandwiched between two fabulously wealthy areas, Los Angeles and Orange County. It is roughly equidistant from the two largest ports in the United States, Los Angeles and Long Beach. It has air hubs for FedEx and Amazon, as well as a rail network. It is criss-crossed by expressways, which carry goods shipped from Asia all over the country. And it has a growing population. cbra, a real estate firm, says warehouse construction has been frenetic, reaching a record 39 million square feet in the second quarter. As soon as the buildings are completed, they are filled: the vacancy rate is 0.2%, lower than anywhere else in the world. Such is the clamor for the space that rents have soared 72% in the last 12 months.

It seems logical that corporate renters would balk at such eye-popping increases if they believe consumer demand is peaking. But rents are still a relatively small part of logistics costs. james breeze cbra estimates that freight transportation accounts for about half of a typical company’s supply chain expenses. Warehouse rent is only 6%. In prime locations near ports, such as the Inland Empire, warehouses may be worth paying for if you reduce transportation costs.

In addition, structural changes in the global economy are accelerating demand. The shift to e-commerce, although it has slowed since the height of the pandemic, requires much more storage space than physical retail: products are shipped in individual packages, not on space-saving pallets, and returns are piling up. . geopolitical risks have increased the desire for additional storage space. Prologis believes that its customers want about a tenth more “safety stock” than reserve stock.

The Inland Empire also illustrates some of the growing pains, including the first signs of a backlash from the public. Environmentalists claim that local councils approved planning applications during the pandemic with little scrutiny. A draft statement calling for a moratorium on warehouse construction in the Inland Empire, co-authored by Susan Phillips, director of the Robert Redford Conservancy at Pitzer College, outlines a growing public health crisis, especially due to pollutants emitted by consumers. of diesel. trucks passing schools and hospitals, and clogging highways. This year, air quality authorities in Southern California began imposing a quasi-tax on warehouse owners based on “indirect” emissions from the trucks that serve them. “They are definitely becoming very anti-diesel,” says a logistics manager. John Husing, a local economist, derides environmental rejection as “noblesse-oblige trash” by wealthy members of the Inland Empire. More working-class communities welcome the decent jobs provided, she says. There are few other employment opportunities.

The school of hard NOx

Storage companies say they are beginning to clean up their act. Amazon ordered 100,000 delivery vans from Rivian, which makes electric pickup trucks. Prologis is building a separate business to provide charging stations for electric trucks. It intends to increase the generating capacity of solar panels on its generous roofs tenfold in ten years. However, for many years to come, it is unlikely that the industry will be able to abandon diesel.

Mr. Bekendam, or Farmer Randy as he is known, acknowledges that stopping the warehouse boom is an uphill battle. But he keeps fighting. He at least hopes that the publicity he generates from his popular property will make the developers think twice before demolishing it. “No one wants to be guilty of paving Amy’s Farm.”

Read more from Schumpeter, our columnist on global business:
The Rise of the Borderless Trustee (September 15)
Starbucks and the perils of corporate succession (September 8)
Is Nvidia underestimating the chip crisis? (September 1st)

For more expert analysis of the biggest stories in economics, business and markets, sign up for Money Talks, our weekly newsletter.

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